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Boeing vs. Caterpillar: Which Stock's Dividend Dominates?

Two of the world's leading industrial manufacturers square off in a battle of dividend fundamentals.

Dividend stocks outperform non-dividend-paying stocks over the long run. It happens in good markets and bad, and the benefit of dividends can be quite striking -- dividend payments have made up about 40% of the market's average annual return from 1936 to the present day.

But few of us can invest in every single dividend-paying stock on the market, and even if we could, we're likely to find better gains by being selective. Today, two of the world's leading heavy industrial manufacturing companies -- one on land, one in the air -- will square off in a head-to-head battle to determine which offers a better dividend for your portfolio.

Tale of the tapeFounded in 1916, Boeing(NYSE:BA) is one of the world's largest commercial jet manufacturers (ranking either first or second in any given year), and is the second-largest aerospace and defense contractor in the world, behind only Lockheed Martin. Boeing is also a component of the Dow Jones Industrial Average, reflecting its importance to the American economy. Headquartered in Chicago, the company serves both commercial and military customers in over 150 countries, and is one of the largest U.S. exporters by sales. Boeing's Next-Generation 737 tends to be the world's most popular jet airliner, and most of its other jets are mainstays on airport tarmacs around the world as well.

Founded in 1925, Caterpillar (NYSE:CAT) is the world's largest manufacturer of construction and mining equipment, and ranked among the top 50 Fortune 500 companies in the U.S. for 2012. Caterpillar is also a component of both the Dow. Headquartered in Peoria, Ill., Caterpillar traces its roots from the merger of the Holt Manufacturing Company and the C.L. Best Tractor Company. The company has grown through a number of acquisitions over the past decade, including Shin Caterpillar Mitsubishi in 2008, Caterpillar Xuzhou and MWM Holding in 2010 and Bucyrus International in 2011. Caterpillar heavy machinery is as common at construction and excavation sites as Boeing's jets are at airports, which makes this a classic battle of land versus air.

Round one: endurance (dividend-paying streak)Boeing began paying annual dividends in 1942 but switched to quarterly dividends in 1954, which adds up to a 71-year dividend-paying streak. Caterpillar, on the other hand, had been making dividend payments since 1950s, but ceased during the 1960s and did not resume payments until 1982. This one's an easy win for Boeing.

Winner: Boeing, 1-0.

Round two: stability (dividend-raising streak)According to Dividata, Boeing has been increasing its dividend payouts at least once per year since 2004, but the company held its dividends firm between 2010 and 2011. By contrast, Caterpillar's increased its dividend payments at least once every year since 1994, which lets it win the stability crown without any hassles.

Winner:Caterpillar, 1-1.

Round three: power (dividend yield)Some dividends are enticing, but others are merely tokens that barely affect an investor's decision. Have our two companies sustained strong yields over time? Let's take a look:

Round five: flexibility (free cash flow payout ratio) A company that pays out too much of its free cash flow in dividends could be at risk of a cutback, particularly if business weakens. We want to see sustainable payouts, so lower is better:

Bonus round: opportunities and threats Caterpillar may have won the best-of-five on the basis of its history, but investors should never base their decisions on past performance alone. Tomorrow might bring a far different business environment, so it's important to also examine each company's potential, whether it happens to be nearly boundless or constrained too tightly for growth.

One dividend to rule them all In this writer's humble opinion, it seems that Boeing has a better shot at long-term outperformance. Both companies face unique macroeconomic headwinds over the coming decade, but Caterpillar's increasing reliance on mining -- a floundering sector -- and its historical dependence on construction growth are both major drawbacks in a world where construction has stalled and commodity prices have plunged. Despite major defense cutbacks and glitches in the next-gen 787, Boeing still stands to gain from the continued surge in long-distance flights around the world, particularly in regions that are just now beginning to enjoy significant middle-class expansions. You might disagree, and if so, you're encouraged to share your viewpoint in the comments below. No dividend is completely perfect, but some are bound to produce better results than others. Keep your eyes open -- you never know where you might find the next great dividend stock!

Author

Alex Planes specializes in the deep analysis of tech, energy, and retail companies, with a particular focus on the ways new or proposed technologies can (and will) shape the future. He is also a dedicated student of financial and business history, often drawing on major events from the past to help readers better understand what's happening today and what might happen tomorrow.